What’s Wrong With Price Gouging? Nothing!

“It never fails. No sooner does some calamity trigger an urgent need for basic resources than self-righteous voices are raised to denounce the amazingly efficient system that stimulates suppliers to speed those resources to the people who need them. That system is the free market’s price mechanism — the fluctuation of prices because of changes in supply and demand.

When the demand for bottled water goes through the roof — which is another way of saying that bottled water has become (relatively) scarce — the price of water quickly rises in response. That price spike may be annoying, but it’s not nearly as annoying as being unable to find water for sale at any price. Rising prices help keep limited quantities from vanishing today, while increasing the odds of fresh supplies arriving tomorrow.”

~Jeff Jacoby writing in today’s Boston Globe about the latest calamity leading to charges of “price gouging”: the massive pipe break that left dozens of Greater Boston towns without clean drinking water over the weekend.

MP: In response to the reports of “price gouging,” Massachusetts Governor Deval Patrick said “There is never an excuse for taking advantage of consumers, especially not during times like this.’’ With this statement, the governor shows a fundamental lack of understanding about how markets works.

Sellers always try to take advantage of consumers, in the sense that they should always charge “whatever the market will bear,” and this condition should prevail regardless of the circumstances, i.e. after a calamity or before a calamity. For example, thousands, if not millions, of goods are sold daily through Ebay auctions, and in each case the seller is getting a price that reflects “whatever the market will bear.” And those market-determined prices don’t depend on whether the auctions took place before, during, or after a natural disaster.

Each day about 15,000 homes are sold in the U.S., and in each case the homes sell for “whatever the market will bear,” and it doesn’t matter whether it’s a seller’s or buyer’s market, whether it’s the height of a real estate bubble or the bottom of a real estate bust, or whether it’s right before, or right after, a earthquake, flood or hurricane. In some markets, sellers are actually to sell (“scalp”) their homes for more than the list price, a clear case of taking advantage of desperate home buyers by “price gouging.”

I’m very, very confident that the last time Governor Patrick personally sold one of his own homes, shares of stock, boats or paintings he sold his possessions for the highest price possible (“whatever the market would bear”) and not a penny cheaper, and in the process did his very best as a seller in every transaction to “take advantage” of the buyer.

Just like an earthquake, hurricane, flood or massive price breaks don’t change the fundamental laws of physics, gravity or aerodynamics, those disasters also don’t change the basic laws of supply and demand. If sellers of bottled water in Boston are guilty of illegal “price gouging” for selling water at elevated market prices after a major disruption like a massive pipe break, then sellers of all products at all times are guilty of “price gouging.” Sellers always charge “whatever the market will bear,” and are always trying to “gouge” buyers to the maximum extent possible. To act any differently would be foolish and even disruptive to our economic system.

It’s only in the fantasy world of politics that the “anointed elected officials” think they get to be the “price deciders,” and determine if sellers are guilty of “price gouging,” “ticket scalping,” or “predatory pricing.” In the real world of the marketplace it’s much different and much more democratic – the impersonal market forces of supply and demand become the “price deciders,” and we’re all much better off with those market-determined prices than with the artificial prices determined by politicians and bureaucrats.

Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.

He holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University in Washington, D.C. and an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota.

Since 1997, Professor Perry has been a member of the Board of Scholars for the Mackinac Center for Public Policy, a nonpartisan research and public policy institute in Michigan.